Dissenting shares are any shares of company capital stock that are issued and outstanding immediately prior to the Effective Time following the successful consummation of a merger or takeover. These shares will have appraisal rights properly demanded (and not withdrawn or lost) in accordance with the appropriate jurisdictional law in connection with the merger. The owner of these shares is known as the Dissenting Stockholder.
This course of action is only usually applicable to professional investors or institutions with the resources to effect such a strategy. The amount of shares or dissenting stockholders may provide a clue however to the shareholder response to a proposed deal. This in turn mat affect a merger arbitrage trading strategy or investment. Therefore, this is a concept of which all traders should be aware. It is unlikely that dissenting shares will cause a deal to fail but it is possible that the merger or acquisiton may be delayed.
Dissenting Shares Example
The following text is taken from page A-16 on the Form DEFM14A Definitive proxy statement relating to merger or acquisition filed with the SEC by Tiffany & Co. (TIF) on January 6, 2020 in relation to the proposed takeover by LVMH
“(d) Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, Shares issued and outstanding immediately prior to the Effective Time (other than Cancelled Shares) and held by a holder of record who did not vote in favor of the adoption of this Agreement and is entitled to demand and validly demands appraisal of such Shares pursuant to, and complies in all respects with, Section 262 of the DGCL (any such shares meeting the requirements of this sentence, the “Dissenting Shares”) shall not be converted into the right to receive Per Share Merger Consideration, but instead, at the Effective Time, shall be converted into the right to receive payment of such amounts that are payable in accordance with Section 262 of the DGCL (it being understood and acknowledged that at the Effective Time, such Dissenting Shares shall no longer be outstanding, shall automatically be cancelled and shall cease to exist, and such holder shall cease to have any rights with respect thereto, except the right to receive the fair value of such Dissenting Shares to the extent afforded by Section 262 of the DGCL); provided that if any such holder shall fail to perfect or otherwise shall waive, withdraw or lose the right to payment of the fair value of such Dissenting Shares under Section 262 of the DGCL, then the right of such holder to be paid the fair value of such holder’s Dissenting Shares shall cease and such Dissenting Shares shall be deemed to have been converted as of the Effective Time into, and to have become exchangeable solely for the right to receive, without interest or duplication, the Per Share Merger Consideration in accordance with the terms of this Agreement. The Company shall give prompt written notice to Parent of any demands received by the Company for the appraisal of any Shares (or written threats thereof), of any withdrawals (purported or otherwise) of such demands and of any other documents or instruments served pursuant to the DGCL and received by the Company relating to Section 262 of the DGCL and any alleged dissenters’ rights. Parent shall have the right to participate in and direct all negotiations and Proceedings with respect to such demands. Prior to the Effective Time, the Company shall not, without the prior written consent of Parent, and Parent shall not direct the Company to, without the written consent of the Company, make any payment or demand with respect to, or settle or compromise or offer to settle or compromise, any such payment or demand, or agree to do any of the foregoing.”
In this document, dissenters shares are clearly defined and it is shown where shareholders can obtain more information. DGCL is the most common set of rules followed as the majority of public firms are incorporated there and also serves as a guide to other states.
